South Korea Sounds Alarm on Stock Market Bubble Amid Retail Boom

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(Bloomberg) — South Korea issued a warning over signs of a bubble in the nation’s stock market, one of the world’s top performers this year amid a record surge in retail investing spurred by easy money and pandemic free time.

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“It’s true that signs of an unstable bubble have been seen in the stock market under the current excessive liquidity situation,” said Kim Sang-jo, the country’s chief policy secretary, at a parliamentary hearing Friday. “Individual investors with a lack of investment knowledge could suffer losses in the future.”

His comment followed remarks by ruling party lawmaker Hong Sungkook on the recent performance of Ssangyong Cement Industrial Co.’s preferred shares, which rallied 137% in October, even after the firm announced plans to delist them through a buyback that concludes today. Trading in the company’s common stock has been halted since Wednesday, when the preference shares stopped trading.

The Kospi benchmark equity gauge is up 13% this year, surging more than 70% from its March low, with local retail traders pouring record amounts into the $1.8 trillion stock market. Now accounting for about 65% of total daily Kospi trading value, this host of millennial investors has shown a penchant for risky trades including microcaps and preferred stock, which generally pay higher dividends than common shares but lack the latter’s voting rights.

© Bloomberg Ssangyong Cement’s preferred stock deviates from its common stock

This isn’t the first time that officials have warned about the impact of speculative trading. The Korea Exchange cautioned in June about the strong gains in thinly-traded issues with market caps of about $50 million.

Korea Warns of Retail Frenzy as Preferred Stock Soars 1,270%

The lawmaker Hong, the former chief executive officer of Seoul brokerage Mirae Asset Daewoo Co., expressed concern that retail investors flocking to the market could be exploited by speculators who try to manipulate preferred shares.

“There are so many preferred stocks in Korea that are extremely expensive relative to their common stocks — some of them trade at 50 times more,” Hong said. “Retail investors who joined the stock market this year seem to have very shallow knowledge of finance. If interest rates remain low like now, this kind of irrational pricing could distort the entire stock market.”

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